ECONOMIES AND DISECONOMIES OF SCALE

Question 1

What are economies of scale?

Answer 1

Economies of scale happen when a business increases its output/size as the average unit cost decreases.

Question 2

What are the two types of economies of scale?

Answer 2

1. Internal: Achieved by the organization itself.
2. External: Achieved by the industry but benefits the business aswell.

Question 3

What are Purchasing Economies of scale?

Answer 3

These are achieved by bulk-buging (buing supplies in bulk). Businesses can gain discounts.

Question 4

What are Technical Economies of scale?

Answer 4

Bigger units of production can reduce costs thanks to the law of variable proportions.
They are achieved via technology. That is, larger businesses have the capital to invest in newer and better technology, which can bring them cost advantages

Question 5

What are Financial Economies of scale?

Answer 5

Easier for a bigger firm to recieve loans from a bank because they are seen as more trustworthy and less risky. Banks will also reduce the interest rates.

Question 6

What are Managerial Economies of scale?

Answer 6

Boosted productivity because larger firms attract more skilled employees thanks to their prestige and high wages.

Question 7

What are Marketing Economies of scale?

Answer 7

Marketing costs can be spread ou over a higher level of sales which allows bigger businesses to run more effective, professional and bigger marketing campaigns.

Question 8

What are Risk-bearing Economies of scale?

Answer 8

Big businesses can afford producing a bigger range of products and therefore risk one of the products failing.

Question 9

Steps of reaching Economies of scale

Answer 9

1. Increase efficiency of production as the number of outputs increases.
2. Average Cost per unit decreases as a result of this increased production.
3. Fixed Costs are spread over an increased output, thus the average fixed cost decreases

Question 10

What are Diseconomies of scale?

Answer 10

They are an increase in average unit cost as a business increases in size. These often occur after a business has passed a peak of economies of scale.

Question 11

How are diseconmies of scale reached?

Answer 11

1. Pour communication leads to slower decision making.
2. Overworked laborers and depriciating machinery.
3. Marketing mistakes.
4. Pour investments.
5. Managerial. Having over-specialized mqnagers who will refuse to work outised their area of expertise.
6. Purchasing. Businesses will buy too much stock.